The debut of Bitcoin as legal tender in the state of El Salvador was complicated. In just a few hours, international prices fell 17%, dropping to $ 45,000. And the government app didn’t work at times, while few actually made payments through “cryptocurrency”. But the goodness of the experiment will prove itself over time. And it is not even said that the parameters for doing so are what we believe.
President Nayib Bukele announced in June and immediately obtained by Congress that Bitcoin was recognized starting from September 7 as a currency to be compulsorily accepted in payment by other individuals and with which to pay taxes, if desired. One of the main objectives of his government has been from the beginning to alleviate the living conditions of the poorest segment of the population.
70% of the citizens of El Salvador receive remittances from family members abroad, mostly emigrants residing in the USA. In very many cases, these account for half of the total family income. On average, $ 195 a month is sent, something like more than half the legal minimum wage. In total, we are talking about 6 billion in 2020, something like just over 24% of GDP. The problem is that transfer money and banks apply on these remittances very high commissions. It starts from 10-12% and even reaches 33%, depending on the figure.
Bitcoin for fast, secure and zero-cost payments
The lower the amount to be sent home, the higher the incidence of commissions. Since 70% of households in El Salvador do not have a bank account, most of the population remains at the mercy of companies like Western Union and MoneyGram.
Not only are the fees sky-high, but the money transfer takes days, and many customers are afraid that relatives in El Salvador may experience theft and violence upon collection.
With Bitcoin, the scenario has changed radically. The government has launched an app, called Chivo. It allows citizens to receive money in real time and without any fees. Once an emigrant transfers their money in “cryptocurrency”, they can immediately run to cash it in dollars at one of the 200 ATMs installed in the country. Therefore, fast, safer and cost-free transfers. According to President Bukele, companies like Western Union and MoneyGram will lose $ 400 million in commissions per year thanks to Bitcoin. Some come to speculate that the losses will rise to 1 billion.
It may be a coincidence, but since the June announcement, Western Union shares have fallen by 15%, those of MoneyGram by 10%. Clearly, it will take a long time for remittances to be transferred through Chivo or, in any case, through Bitcoin. And we must not ignore the risk of volatility of the asset, which often collapses in double digits even in a few minutes. In fact, beneficiaries risk saving on commissions and losing on conversion, even if done quickly. But at least they have a weapon with which to break free from the traditional payment system. And this is Bukele’s real bet.